Student Loans Are Threatening Older Americans’ Ability to Retire

Recent college grads aren't the only ones suffering from oppressive student loans

Former California state government worker Thomas Villalobos, 66, who is currently unemployed, never thought he’d be nearing retirement and still paying off his student loan. But that’s exactly what has happened to him.

Villalobos, of Loma Rica, Calif., borrowed $12,000 to attend law school back in 1976. Since then, he has sometimes had to defer the loan payments due to a cash shortage, adding interest to the principal. Villalobos figures he’s paid $31,000 in interest over the years and the loan’s balance is right back where it started: $12,000.

Villalobos is looking for work so he can continue making the $160 monthly payments until he’s eventually free and clear. He’s also facing the prospect of watching his 15-year-old son take on student loans when he graduates from high school. “This is no way to educate American students,” Villalobos says. “It’s all about money, not education.”

While much attention has been given recently to the increasingly heavy toll that student-loan debt is exacting on young Americans, there has been less acknowledgment of the gnawing financial threat it represents for boomer retirement.

Difficulty Making Student Loan Payments

Nearly 2 million Americans 60 and older owe a total of $36 billion in student loans, according to the Federal Reserve Bank of New York. Many of those borrowers, like Villalobos, have difficulty making the payments.

Roughly 10 percent of student loans held by people 60 and older are delinquent — and those borrowers now find themselves the targets of a very unforgiving U.S. government. If you default on a student loan, upon your retirement the government can take up to 15 percent of your Social Security, disability and retirement benefits to offset the money that’s due. And you can’t discharge federal student loans by declaring bankruptcy.

Many boomers in their 50s are also facing similar woes. They owe about $104 billion in student loans, according to the Fed, roughly 11 percent of the total outstanding balance.

The Debt That Just Won’t End

The Federal Reserve study didn’t say how much of the boomers’ student loan burden is from their own education and how much is from their kids’. Nor did it note how much is from loans boomers have taken out lately to go back to school.

But Persis Yu, a staff attorney for the Student Loan Borrower Assistance Project at the National Consumer Law Center, believes that many boomers are still paying off undergraduate and grad school loans from decades ago. “We see borrowers paying student loans they took out in the ’70s,” Yu says.

At first glance, it almost seems implausible that people in their 50s and 60s continue to do battle with education debt. After all, most federally backed student loans have terms of 10 years (current interest rate: 3.4 percent; it may double to 6.8 percent on July 1).

But, Yu says, many borrowers who don’t earn enough to cover their payments often consolidate their loans, in effect refinancing them. When that happens, the loan’s term stretches to as long as 30 years.

Help for Economic Hardships

Borrowers facing severe economic hardships can ask lenders for deferments or forbearance. Their payments will then be temporarily suspended, but interest will continue to accrue (except for subsidized loans) and the terms of their loan will be extended.

Often, the accrued interest is capitalized — meaning the amount is added to the principal of the loan and interest is then charged on the new, higher balance.

“These loans can easily double in size and borrowers don’t always realize how quickly the interest adds up,” says Mark Kantrowitz, founder of finaid.org, a website about paying for college.

Often, Kantrowitz notes, boomers who’ve gone back to school for retraining or to change careers fail to recognize how much debt they’re amassing. Some trust that they’ll be able to land work that will keep pace with the debt.

One 68-year-old borrower named Edward wrote to Kantrowitz recently, saying that he returned to college 13 years ago to earn a master of social work degree and has worked in a state psychiatric hospital since then. Although Edward would like to retire soon, he borrowed so heavily that he is now scheduled to make payments until he’s 88. If he retires, Edward estimates, one-third of his Social Security check will go toward the student loan payments each month.

College tuition bills for their children also contribute to the boomer student-loan burden. “We analyzed the Fed numbers and it’s pretty clear that the federal Parent Plus loans some boomers take out for their kids’ college tuitions are part of the equation,” says Lauren Asher, president of the Institute for College Access and Success, a nonprofit advocacy group for affordable education.

Government-sponsored Parent Plus loans currently come with a fixed 7.9 percent rate and generally must be repaid over 10 to 25 years. A retired school nurse who wrote to Kantrowitz says her monthly PLUS payments for her oldest son exceed her monthly income.

Private student loans made by banks and other lenders can be discharged through bankruptcy, but they usually don’t have the same consumer protections as federal loans. For example, if you fall on hard times, you can’t get a payment extension, deferment or forbearance. What’s more, private loans often have variable interest rates (currently typically 9 percent to 11 percent); when rates rise, payment-due amounts can skyrocket.

How to Ease the Burden

There is one strategy that may provide some relief to people in their 50s and 60s who are still paying off federal student loans, Kantrowitz says.

Ask your loan servicer about converting your loan to an income-based repayment plan. For low-income borrowers or retirees on fixed incomes, these plans can significantly reduce payments, Kantrowitz says. (Borrowers who have defaulted on their student loans, however, are not eligible.)

A rule of thumb for qualifying for this program is that your loan balance must be more than your annual income. But the formula used by lenders can vary based on your family’s size and other factors. After 25 years, if the income-based repayment plan loan isn’t paid off, it is forgiven.

“Twenty-five years is little consolation to older borrowers,” Yu says. “But the program is one of the only ways we’ve found to make payments relatively affordable.”

Unfortunately for parents, undergraduate PLUS loans are not eligible for the income-based repayment plans. Their best strategy may be to ask lenders for an extended repayment plan, Kantrowitz says. It will lengthen the life of the loan — usually to 25 to 30 years — but may help lower monthly payments enough to let you cover other monthly expenses more easily, he says.